SESSION 1

Basic terminology and concepts of supply

chain management.

Facilities, function, types

Introduction to Introduction to
Supply Chain Need, benefits

elements

challenges
Some Estimates for India
---------------------------------------------------------------------

LOGISTICS SPEND US $ 50 B

SHARE OF GDP 12 - 13 %

MAJOR ELEMENTS ARE ( % AGE OF TOTAL ) :

 TRANSPORTATION 35
 INVENTORIES 25
 PACKAGING 11
 HANDLING & WAREHOUSING 9

OTHERS 6

LOSSES 14
 ------------------------------------------------------------------------------------------------

LOGISTICS COSTS CAN BE 6 - 7 % OF GROSS SALES CAN GO UP
TO 14 - 15 %. FOR SECTORS LIKE CEMENT AND BULK MATERIALS.
 Global Logistics Industry
Country’s spending on logistics management

Country Logistics spend 3rd Party Logistics

Activities
(% of GDP) (% of total movement)
US 9.50 % 57 %
Japan 10.50 % 80 %
UK 11.00 %
Canada 12.00 %
Germany 13.00 %
China 18.60 % < 10 %
Argentina 22.00 %
Peru 24.00 %
India 13.00 % < 10 %
WHAT IS SUPPLY CHAIN MANAGEMENT
 What Is the Supply Chain?
Also referred to as the logistics network
Suppliers, manufacturers, warehouses, distribution
centers and retail outlets – “facilities”
Suppliers Manufacturers Warehouses & Customers
Distribution Centers

and the

Raw materials
Work-in-process (WIP) inventory Transportation Transportation
Costs Costs

Finished products
Material Costs Transportation
Manufacturing Costs Inventory Costs
Costs

that flow between the facilities

 Supply chain management-defined

Supply chain management is a set of

approaches utilised to efficiently integrate
suppliers, manufacturers, warehouses and
stores , so that merchandise is produced and
distributed at the right quantities , to the right
location and at the right time, in order to
minimise system wide costs while satisfying
service level requirements.
The Supply Chain
Suppliers Manufacturers Warehouses & Customers
Distribution Centers

Transportation Transportation
Costs Costs
Material Costs Transportation
Manufacturing Costs Inventory Costs Costs
8
What Is Supply Chain Management (SCM)?

Plan Source Make Deliver Buy

A set of approaches used to efficiently integrate

 Suppliers
 Manufacturers

Warehouses
 Distribution centers
So that the product is produced and distributed
 In the right quantities
 To the right locations
 And at the right time
System-wide costs are minimized and
Service level requirements are satisfied
 Facilities
Warehouses
Factories
Processing centers
Distribution centers
Retail outlets
Offices
 Functions and Activities
Forecasting
Purchasing
Inventory management
Information management
Quality assurance
Scheduling
Production and delivery
Customer service
 Typical Supply Chains

Production Distribution
Purchasing Receiving Storage Operations Storage
 ….No ideal supply chain model
Functional Products v/s innovative
products

Toothpaste
Cars
Soups
Furniture
Mobile phones
 Need for Supply Chain
Management
1.Improve operations
2.Increasing levels of outsourcing
3.Increasing transportation costs
4.Competitive pressures
5.Increasing globalization
6.Increasing importance of e-commerce
7.Complexity of supply chains
8.Manage inventories
 Benefits of Supply Chain
Management
Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
Elements of Supply Chain Management
History of Supply Chain Management

1960’s - Inventory Management Focus, Cost Control

1970’s - MRP & BOM - Operations Planning
1980’s - MRPII, JIT - Materials Management, Logistics
1990’s - SCM - ERP - “Integrated” Purchasing,
Financials, Manufacturing, Order Entry
2000’s - Optimized “Value Network” with Real-Time
Decision Support; Synchronized &
Collaborative Extended Network
 Supply chain Management : Key Issues
Issue Components
-
Supply contracts Comprehensive relationship-
price,discounts,volummes, deliveries

Distribution network configuration multiple manufacturing, warehouses, retail

distribution

Strategic alliances Partnerships in SCM

Distribution strategies Cross-docking?

Outsourcing and procurement Trade-off –make or buy. Risks of

strategies outsourcing, e-procurement

Product design Impact on inventory, transport,lead times

IT Data analysis,e-commerce,RFID
 ….No ideal supply chain model
Functional Products v/s innovative
products

Toothpaste
Cars
Soups
Furniture
Mobile phones
 Supply chain management
Challenges


SCM strategies can not be in isolation, have to align
with another chain- the development chain (new
product introduction) as well as overall org.
objectives.


Achieving the best solution with minimizing costs and
maintaining service levels- Global optimisation


Facing uncertainties and risk – customer demand,
travel time, break downs,
 Supply chain management
Challenges - Nike

 Supply chain configuration

 120 countries, 20000 styles/season, 800 factories

Challenge 1- Local factors- tariff resulting in consolidation, Infrastructure-

Challenge 2- Consumer – Choices –product proliferation- lean
manufacturing
Challenge 3- retail customers- Shorter lead times

Challenge 4- Conflict- cost & flexibility – offshore v/s onshore –lead times
 Supply chain management
Needs to be efficient and cost effective


Across physical infrastructure

 Across entire system-Global optimisation

 Across levels from strategic to tactical

Components of logistics
management : Management actions
Outputs of
Planning Implementation Control logistics
Inputs into logistics
Natural resources Marketing
(land, facilities, and Logistics management
Customer orientation
equipments) Supplier (competitive
Raw In-process Finished s
s materials inventory goods advantage)
Human resources Time and
Logistics Activities place utility
•Customer Service •Plant and warehouse site
Financial resources Efficient
•Demand forecasting selection movement to
•Procurement
•Distribution customer
Information •Packaging
communications
resources •Return goods handling
•Inventory control •Salvage and scrap
•Material handling disposal Proprietary
•Order Processing •Traffic and transportation asset
•Parts and service •Warehousing and
support storage
 SESSION 2
Cycle view

Push/Pull view

Process views of Supply Chain

Macro processes
Customer Relationship Management
(CRM)
Internal supply chain management
(ISCM)
Supplier Relationship Management
(SRM)
Supply chain management-Process views

Supply chain as a sequence of processes and flows that

take place within and between diferent stages and
combine to fill as customer need for a product.

Cycle view

Processes are divided into a series of cycles, each performed

at the interface between two successive stages .

Push/Pull view

Pull processes- initiated by customer orders

Push processes- initiated in anticipation of customer order
Cycle View of Supply Chains

Customer

Customer Order Cycle to

Retailer

Replenishment Cycle to

Distributor

to
Manufacturing Cycle

Manufacturer

Procurement Cycle to
Supplier
Supply chain management-Cycle view
Each cycle occurs at the interface between two successive
stages of the supply chain

Not every supply chain will have all four cycles clearly
separated

Each cycle has sub-processes

Customer Order Cycle
Replenishment Cycle
Manufacturing Cycle
Procurement Cycle
Supply chain management-
Push/Pull views
Processes in a supply chain fall into one of
the two categories depending on the timing
of execution relative to end customer
demand.

Pull processes- Reactive with

certainty of demand
Push processes- Speculative
processes with demand estimates
 Supply chain management-Push/Pull views
Push and Pull supply chain (Hybrid)
Push-
pull
bound
ary
Push Pull

Raw
Customer
Materials

PC manufacturer
Components Final
( Forecast assembly
based ) (Order based)
 Cycles

Pull
Customer Customer arrival
Order Customer order entry
Customer order fulfilment
Customer order receiving

Replenishment Retail order trigger

Retail order entry
Retail order fulfilment
Retail order receiving
Push

Manufacturing Order arrival from distributors

Production scheduling
Manufacturing and Shipping
Receiving (distributors, retailers,
customers

Procurement
 Supply chain strategies

Push (Forecast based)

Pull (Demand based)

Hybrid
 Supply chain strategies

Push based supply chain (Forecast based)

 Based on long-term forecasts(retailers)

 Delays reactions
 Inability to meet demand pattern changes
 Obsolescence when demand disappers
 excess/short inveontories
Lower service levels
 Supply chain strategies

Pull based supply chain (demand based)

 Based on customer demand

 Firm responds only to order
 Lesser lead time
 lesser inventory levels
 Less variability
 Lower service levels
Difficult when lead times are high
 Framework for matching products with strategies
The right strategy
Demand
uncertainity
Q1 Q2
Pull High

Q2 Q4
Pull

Push

Low
High
Economies of Scale
Furniture
Books Pull
Push
Grossary
centrifuges soaps Toys Jewellery
Computer
Garments Watches Water pumps
 Demand driven supply chain strategies

Demand forecast – Historical demand data

Demand shaping- Impact of promotions,discounts etc.

 Measuring accuracy of forecast

Arrive at demand (SKU wise, location wise)

Analyse supply chain to match support for demand

 Supply chain macro processes

supplier Firm Customer

SRM ISCM CRM

Arranges and manages Planning of internal CRM aims to generate
sources for various production and storage customer demand and
goods and services capacities, demand facilitate placement and
supply plans tracking of orders
Source Strategic planning Market
Negotiate Demand planning Price
Buy Supply planning Sell
Design collaboration Fulfillment Call center
Supply collaboration Field service Order Management
 SESSION 3

Competitive and supply chain

strategies
Achieving Strategic Fit
Achieving strategic fit
and Scope: Supply
Chain Drivers and
Expanding strategic scope
Obstacles
 Competitive and Supply
Chain Strategies
Competitive strategy:

defines the set of customer needs a firm seeks to
satisfy through its products and services
Low cost, Rapid Response, Product Differentiation
Ex: Pantaloons versus factory outlets
HP versus Dell
Supply chain strategy:
 determines the nature of material procurement,

transportation of materials, manufacture of product or

creation of service, distribution of product
Consistency and support between supply chain strategy,
competitive strategy, and other functional strategies is
important!
 Competitive Strategy Types

Defender - operational efficiency

- Wal-Mart, ExxonMobil?

Prospector - innovation
- Nike, Leitch Technology?

Analyzer - minimize risk through proven opportunities

- Hewlett-Packard, Toyota?

Reactor - quick response to immediate market demands

- ???
 The Value Chain: Linking Supply Chain and
Business Strategy

Competitive Strategy

New Product Marketing

Strategy Supply Chain Strategy
Strategy

New Marketing
Product and Operations Distribution Service
Development Sales

Finance, Accounting, Information Technology, Human Resources

 Strategic planning
 Product development strategy: specifies the portfolio
of new products that the company will try to develop
 Marketing and sales strategy: specifies how the
market will be segmented and product positioned,
priced, and promoted
 Supply Chain Strategy
Traditionally, SC strategy includes
-Suppliers Strategy
-Operations Strategy
-Logistics Strategy
Involving
inventory, transportation, operating facilities, information
flows.
 Achieving Strategic Fit
What is strategic fit?
How is it achieved?
Other issues affecting strategic fit
 Achieving Strategic Fit
Strategic fit:
 Consistency between customer priorities of

competitive strategy and supply chain

capabilities specified by the supply chain
strategy
 Competitive and supply chain strategies have

the same goals

A company may fail because of a lack of
strategic fit
Example of strategic fit – Dell, Designer
garments
How is Strategic Fit Achieved?
Step 1: Understanding the customer and
supply chain uncertainty
Step 2: Understanding the supply chain
capabilities
Step 3: Achieving strategic fit
Step 1: Understanding the Customer and
Supply Chain Uncertainty
Identify the needs of the customer segment being served
by the following attributes:
 Quantity of product needed in each lot


Response time customers will tolerate

Variety of products needed
 Service level required

 Price of the product

 Desired rate of innovation in the product

Ex: 7-Neighbourhood store vs. Hypermart

Step 1: Understanding the Customer and
Supply Chain Uncertainty
Understand the overall attributes of customer demand
Demand uncertainty: uncertainty of customer demand for
a product
Implied demand uncertainty: resulting uncertainty for the
supply chain due to the portion of the demand the supply
chain is required to handle and attributes the customer
desires
Ex: A firm supplying only emergency orders for a product
faces higher implied demand uncertainty then when there
is long lead time.
Ex: Implied demand uncertainty increases with service
level, but demand uncertainty does not change.
Step 1: Understanding the Customer and
Supply Chain Uncertainty
Implied demand uncertainty also related to customer
needs and product attributes

First step to strategic fit is to understand customers by

mapping their demand on the implied uncertainty
spectrum
Step 1: Understanding the Customer and
Supply Chain Uncertainty
Understanding the Customer
 Lot size


Response time
Implied

Service level
Demand
 Product variety
Uncertainty
 Price

 Innovation
 Impact of Customer Needs on Implied
Demand Uncertainty
Customer Need Causes implied demand
uncertainty to increase because …

Range of quantity increases Wider range of quantity implies

greater variance in demand
Lead time decreases Less time to react to orders

Variety of products required increases Demand per product becomes more

disaggregated

Number of channels increases Total customer demand is now

Rate of innovation increases
Required service level increases
disaggregated over more channels
New products tend to have more uncertain
demand
Firm now has to handle unusual surges
in demand
Levels of Implied Demand Uncertainty

Detergent High Fashion

Long lead time steel Palm Pilot
Purely functional products Entirely new products

Customer Need
Price Responsiveness

Low High

Implied Demand Uncertainty

 Correlation Between Implied Demand
Uncertainty and Other Attributes
Attribute Low Implied High Implied
Uncertainty Uncertainty

Product margin Low High

Avg. forecast error 10% 40%-100%

Avg. stockout rate 1%-2% 10%-40%

Avg. forced season- 0% 10%-25%

end markdown

Examples ?? ??
 Step 2: Understanding the
Supply Chain
How does the firm best meet demand?
Dimension describing the supply chain is supply chain
responsiveness
Supply chain responsiveness -- ability to

respond to wide ranges of quantities demanded
 meet short lead times

 handle a large variety of products

 build highly innovative products


meet a very high service level
 Step 2: Understanding the
Supply Chain
There is a cost of achieving responsiveness
Supply chain efficiency: cost of making and delivering
the product to the customer
Increasing responsiveness results in higher costs that
lower efficiency
Figure cost-responsiveness efficient frontier
Figure supply chain responsiveness spectrum
Second step to achieving strategic fit is to map the
supply chain on the responsiveness spectrum
Understanding the Supply Chain: Cost-
Responsiveness Efficient Frontier
Responsiveness

High

Low
Cost
High Low
 Responsiveness spectrum

Highly efficient Somewhat Somewhat Highly

efficient responsive responsive

Automobiles Retails stores -

Integrated Apparel-
stocks change
steel plant make to
during day
stock
 Physically efficient V/s responsive
supply chains
Physically efficient Responsive supply chains

Primary purpose Supply predictable demand Respond quickly to

efficiently at lowest possible unpredictable demand to
cost minimise stockouts,
markdowns and obsolete
inventory
Manufacturing focus High utilisation Deploy excess buffer
capacity

Inventory strategy Generate high turns and Deploy significant buffer

mimimize inventory stocks of parts or finished
goods
Lead time focus Shorten lead time without Invest aggressively in ways
increasing cost to reduce lead time

Supplier selection Primarily for cost and quality Primarily for speed, flexibility
and quality
 Step 3: Achieving Strategic Fit

Step is to ensure that what the supply chain does well is

consistent with target customer’s needs
Fig. : Zone of strategic fit
Examples: Dell, maggie noodles
 Achieving Strategic Fit Shown on the
Uncertainty/Responsiveness Map
Responsive
supply chain

o f t
Responsive n e
c Fi
ness Zo tegi
spectrum tra
S

Efficient
supply chain

Certain Implied Uncertain

demand uncertainty demand
spectrum
 Step 3: Achieving Strategic Fit

All functions in the value chain must support the

competitive strategy to achieve strategic fit
Two extremes: Efficient supply chains (Cement) and
responsive supply chains (Dell) –
Two key points

there is no right supply chain strategy independent of
competitive strategy
 there is a right supply chain strategy for a given

competitive strategy
 Other Issues Affecting Strategic Fit

Multiple products and customer segments

Product life cycle
Competitive changes over time
 Multiple Products and
Customer Segments
Firms sell different products to different customer
segments (with different implied demand uncertainty)
The supply chain has to be able to balance efficiency
and responsiveness given its portfolio of products and
customer segments
Two approaches:

Different supply chains if the segments are large
enough
 Tailor supply chain to best meet the needs of each

product’s demand, i.e., share some links.

 Product Life Cycle

The demand characteristics of a product and the needs

of a customer segment change as a product goes
through its life cycle
Supply chain strategy must evolve throughout the life
cycle
Early: uncertain demand, high margins (time is
important), product availability is most important, cost is
secondary
Late: predictable demand, lower margins, price is
important
 Product Life Cycle

Examples: pharmaceutical firms, Intel

As the product goes through the life cycle, the
supply chain changes from one emphasizing
responsiveness to one emphasizing efficiency
 Competitive Changes Over
Time
Competitive pressures can change over time
More competitors may result in an increased
emphasis on variety at a reasonable price
The Internet makes it easier to offer a wide
variety of products
The supply chain must change to meet these
changing competitive conditions
 Expanding Strategic Scope
Scope of strategic fit

The functions and stages within a supply chain that devise
an integrated strategy with a shared objective
 One extreme: each function at each stage develops its
own strategy
 Other extreme: all functions in all stages devise a strategy
jointly
Five categories:
 Intracompany intraoperation scope

Intracompany intrafunctional scope

Intracompany interfunctional scope
 Intercompany interfunctional scope
 Flexible interfunctional scope
 Strategic Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
 Intracompany
Intraoperational Scope
One operation within a functional area in a
company
Each operation within each stage of the supply
chain devises a strategy independently and
attempts to optimize its own performance
independently
Usually results in different operations having
conflicting objectives – does not maximize total
supply chain profits
 Strategic Scope:
Intracompany Intraoperation Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
 Intracompany
Intrafunctional Scope
Strategic fit is expanded to include all
operations within a function
Attempt to maximize performance for the
entire function
 Strategic Scope:
Intracompany Intrafunctional Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
 Intracompany
Interfunctional Scope
All functional strategies within a company
are developed to support each other and
the company’s competitive strategy
Strategic fit is expanded to include all
functions in a firm
Goal is to maximize company profit
 Strategic Scope:
Intracompany Interfunctional
Scope
Suppliers Manufacturer Distributor Retailer Customer

Competitive
Strategy

Product Dev.
Strategy

Supply Chain
Strategy

Marketing
Strategy
 Intercompany
Interfunctional Scope
The only positive cash flow for the supply chain occurs
when the customer pays for the product –
all other cash flows are resettling of accounts within
the chain and add to total supply chain cost
Supply chain surplus
 Difference between what the customer pays and

total supply chain cost

 Total profit to be shared among all members of the

supply chain
 Intercompany
Interfunctional Scope
Increasing supply chain surplus increases the
amount to be shared
All stages coordinate strategy across all functions
to ensure that they best meet the customer’s
needs and maximize supply chain surplus
Also provides more speed by managing the
interfaces between supply chain stages
Each company must evaluate its actions in the
context of the entire supply chain